Tca/579/2014 Of Commissioner Of Income Tax v. M/S Adithyaram Properties P

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HON'BLE MR. JUSTICE T.S. SIVAGNANAMAND THE HON'BLE MR. JUSTICE SATHI KUMAR SUKUMARA KURUP Commissioner of Income Tax,Central Circle,Chennai.... Appellant/Respondent M/s.Adityaram Properties (P) Ltd.,No.14, Ambadi Road,Kotturpuram,Chennai – 600 085.... Respondent/Appellant Tax Case Appeal preferred under Section 260A of the IncomeTax Act, 1961, against the order, dated 20.01.2011, passed bythe Income Tax Appellate Tribunal, Chennai "D" Bench, inI.T.A.No.744/Mds/2010, for the Assessment Year 2007-08 againstthe order of the Commissioner of Income tax (Appeals)-III atChennai dated.30.03.2010 in ITA No.182/09-10/A-III Pertaining toAsst.Year 2007-2008 against the order of the Deputy Commissionerof Income Tax(circle I(1)) Chennai, dated.30.10.2009 in PA/GIRNo.AAACB2216N. This Tax Case Appeal filed by the Revenue under Section 260-A of the Income Tax Act, 1961 ("the Act" for brevity), isdirected against the order, dated 20.01.2011, passed by theIncome Tax Appellate Tribunal, Chennai "D" Bench, in https://hcservices.ecourts.gov.in/hcservices/ I.T.A.No.744/Mds/2010, for the Assessment Year 2007-08. 2.The appeal was admitted on 02.09.2014 on the followingsubstantial questions of law : “1.Whether on the facts and circumstances ofthe case, the Tribunal was right in law in holdingthat the price for the land purchased and paid tothe Director was not excessive while comparing withthe fair market value of the land which was Rs.1.36Lakhs per cent? 2.Whether on the facts and circumstances ofthe case, the Tribunal was right in law in holdingthat long term capital gain is not leviable on thelands sold and the provisions of Section 40A(2)(b)are not applicable? 3.Whether on the facts and circumstances ofthe case, the Tribunal was right in upholding theorder of CIT(A) by allowing the expenditure onpurchase of land at Rs.2.75 Lakhs per cent wasproper?” 3.The respondent/assessee is a company engaged in RealEstate Development and they filed return of income for theAssessment Year under consideration, i.e., AY 2007-08, on14.11.2007, declaring 'NIL' income. The return was initiallyprocessed under Section 143(1) of the Act and subsequently, thecase was selected for scrutiny and notice under Section 143(2)was issued. The Assessing Officer found that the assessee hadpurchased land to the cost of Rs.19.51 Crores and the total costof the land sold during the year and debited to profit and lossaccount was Rs.8,01,61,275/-. The assessee was directed tofurnish details of the land purchased by them. On details beingfurnished, the Assessing Officer came to know that the assesseecompany had purchased larger extent of land from its twoDirectors/shareholders at the rate of Rs.3 Lakhs per cent.Ultimately, these lands, which were purchased, were sold tothird party buyers as many as 41 of them. The Assessing Officerfound that the lands have been sold by the assessee in the yearunder consideration at the rate of Rs.1.36 Lakhs per cent, whichis far less than the Guideline Value which was 1.75 Lakhs percent at the relevant point of time, which is far far less thanthe selling price paid to the Directors, which was Rs.3 Lakhsper cent. Therefore, the Assessing Officer held that theassessee company has incurred expenditure in respect of thepayment which has been made to the Directors and the expenditureis excessive and unreasonable and therefore, invoked theprovisions of Section 40A(2)(b) of the Act and completed theassessment vide order dated 30.10.2009. 4.Aggrieved by the same, the assessee preferred an appealbefore the Commissioner of Income Tax (Appeals)-III, Chennai(“CIT(A)” for brevity). So far as the correctness of the orderpassed by the Assessing Officer invoking Section 40A(2)(b) ofthe Act is concerned, the CIT(A) granted the relief to theassessee, however, the CIT(A) directed the Assessing Officer toallow the expenditure on purchase of land @ Rs.2,75,000/- percent and to disallow @ Rs.25,000/- per cent, which was paid tothe Directors. 5.Aggrieved by the said order, the Revenue as well as theassessee filed appeals before the Tribunal. The appeal filed bythe Revenue was numbered as I.T.A.No.744/Mds/2010 and the appealfiled by the assessee was numbered as I.T.A.No.812/Mds/2010.The Tribunal, by the impugned common order, dismissed the appealfiled by the Revenue and allowed the appeal filed by theassessee. 6.The Revenue, aggrieved by the dismissal of their appealby the Tribunal which was numbered as I.T.A.No.744/Mds/2010, haspreferred the above Tax Case Appeal. 7.We have elaborately heard Mr.T.R.Senthil Kumar, learnedSenior Standing Counsel for the appellant/Revenue andMr.R.Venkata Narayanan, learned counsel appearing forM/s.Subbaraya Aiyar Padmanabhan, counsel for the respondent/assessee. 8.The sole reason for which the Assessing Officer invokedSection 40A(2)(b) of the Act is for the reason that theDirectors of the company were paid Rs.3 Lakhs per cent for thepurchase of the land, whereas, the lands have been sold by theassessee to about 41 purchasers with an average selling price atRs.1.36 Lakhs per cent of land, and therefore, the expenditureincurred by the assessee company for payment of the sale priceto the Directors is exorbitant and accordingly, Section 40A(2)(b) of the Act would stand attracted. The CIT(A), whileconsidering the correctness of the said finding, has examinedthe entire facts in a very elaborate manner and found that theassessee had paid a sum of Rs.3 Lakhs per cent for the landpurchased from its Directors, which was sold to third partiesduring the year under consideration at the rate of Rs.1.36 Lakhsper cent, however, in the subsequent years, it was sold @Rs.2.72 Lakhs per cent and thereafter, at Rs.6.36 Lakhs percent. Thus, taking into consideration the totality of thecircumstances and that the decision taken by the assessee was abusiness decision and taking note of the latest sale price, theassessee had a substantial gain of Rs.19 Crores, the CIT(A)granted relief to the assessee. However, the CIT(A) directedthe Assessing Officer to allow the expenditure @ Rs.2,75,000/- per cent and disallow @ Rs.25,000/- per cent. 9.We find from the order of the CIT(A) that there is noreason given by the CIT(A) for disallowing Rs.25,000/- per cent.This finding would run contrary to the finding recorded by theCIT(A) in Para No.6.4 of the order dated 30.03.2010, wherein,the assessee was granted relief and on facts it was held thatthe decision for purchase of land from the Directors at Rs.3Lakhs per cent was a business decision and it was shown beforethe CIT(A) that the assessee company benefited out of the saiddecision and substantial profits were earned by the assesseecompany. Thus, the Tribunal was right in setting aside theportion of the order passed by the CIT(A) disallowing the sum ofRs.25,000/- per cent. per cent and disallow @ Rs.25,000/- per cent. 9.We find from the order of the CIT(A) that there is noreason given by the CIT(A) for disallowing Rs.25,000/- per cent.This finding would run contrary to the finding recorded by theCIT(A) in Para No.6.4 of the order dated 30.03.2010, wherein,the assessee was granted relief and on facts it was held thatthe decision for purchase of land from the Directors at Rs.3Lakhs per cent was a business decision and it was shown beforethe CIT(A) that the assessee company benefited out of the saiddecision and substantial profits were earned by the assesseecompany. Thus, the Tribunal was right in setting aside theportion of the order passed by the CIT(A) disallowing the sum ofRs.25,000/- per cent. 10.The learned Senior Standing Counsel for theappellant/Revenue placed reliance on the decision of the Hon'bleDivision Bench of this Court in the case of V.S.T. Motors Ltd.v. Commissioner of Income Tax reported in (2004) 135 Taxman 91(Mds). In the said case, the assessee company carried onbusiness as agents of certain truck manufacturers and maintaineda stock-yard and had engaged a transport firm for the purpose oftransporting trucks from the stock-yard to the showroom anddelivering to customers. The Assessing Officer as well as theAppellate Authority disallowed a part of the transportationcharges paid to the said firm as excessive under Section 40A(2)of the Act on finding that the owners of the firm were theDirectors of the assessee company and close relative of theother Directors. On facts, the Hon'ble Division Bench foundthat the provisions of Section 40A(2) of the Act would standattracted. In the instant case, the assessee has been able toshow that the decision for purchase of land @ Rs.3 Lakhs percent was a prudent business decision, as the assessee was ableto earn substantial profit on account of the sale of the land tovarious third parties at much higher price @ Rs.6.36 Lakhs percent. Therefore, we find that the decision is distinguishableon facts. 11.Reliance has been placed on the decision of the DivisionBench of this Court in the case of Vaduganathan Talkies vs.Income Tax Officer, Non-Corporate Ward 20(5), Chennai-34reported in [2020] 120 taxmann.com 25 (Madras). In the saidcase, the assessee company had made cash payment for the purposeof acquiring rights to screen movies in theatres, which ran toseveral lakhs of rupees, though payees were identifiable, andsince inspite of availability of Banking facility, the assesseehad been regularly effecting cash payments, the said paymentswere disallowed in terms of Section 40A(3) of the Act r/w. Rule6DD of the Income Tax Rules, 1962. The case on hand is couchedentirely on different factual settings and the decision in Vaduganathan Talkies (supra) cannot be applied to the facts ofthe case on hand. Vaduganathan Talkies (supra) cannot be applied to the facts ofthe case on hand. 12.The learned counsel placed reliance on the decision ofthe Hon'ble Division Bench of this Court in Patterson & Co. (P.)Ltd. vs. Deputy Commissioner of Income-tax, Company Circle V(1),Chennaireported in [2019] 105 taxmann.com 150 (Madras). In thesaid case, the genuineness of the transactions was in question,but so far as the case on hand is concerned, genuineness oftransaction has not been questioned, but the only reasoninvoking Section 40A(2)(b) of the Act is of the ground that thelands which were purchased from the Directors at Rs.3 Lakhs percent have been sold at Rs.1.36 Lakhs per cent. The assessee hasgiven more than one explanation for such a decision. Firstly,because, the assessee company owns the land behind the landsowned by the Directors and if the lands owned by the Directorsare purchased, then it would give better access to the landowned by the company and it will be a good decision of thecompany to improve its financial well being. These decisionsare all commercial decisions, which have to be taken by theassessee, and it is not for the Assessing Officer to sit in thearm-chair of the assessee and suggest the ways and means to runtheir business as long as there is no unlawful activity, whichhas been alleged to have been done by the assessee. Thus, weare of the considered view that the Tribunal was right inaffirming the order passed by the CIT(A) holding that thedecision to purchase the lands @ Rs.3 Lakhs per cent from theDirectors was a prudent commercial decision taken by theassessee company. 13.Thus, for the above reasons, we find no ground tointerfere with the order passed by the Tribunal. In the result,this Tax Case Appeal filed by the Revenue is dismissed and thesubstantial questions of law are answered against the Revenue.No costs. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar mkn To 1. The Income Tax Appellate Tribunal, Chennai, “D” Bench. 2. The Commissioner of Income Tax, Central Circle, Chennai. Central Circle, Chennai. 3. Deputy Commissioner of Income-tax, Company Circle I(1), Chennai4. The Commissioner of Income Tax (Appeals III), Chennai +1CC to Mr.T.R.Senthilkumar, SSC in Sr.No.41565+1CC to Mr.Subbaraya Aiyar, Advocate, Sr.No.41933 T.C.A. No.579 of 2014 SRA (CO)K.RK. (17.09.2021)